(Bloomberg) — As President Donald Trump moderates his approach on tariffs, options and futures traders are betting that the Federal Reserve won’t have to cut interest rates as much to fend off a recession.
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Traders across many asset classes have been responding to signals from Trump that a coming wave of tariffs will likely be more targeted than anticipated when the levies are put in place on April 2. Given that tariffs were expected to weigh on economic growth — and force the Fed to step in to boost the economy — any relaxation of tariffs should relieve the pressure on the Fed to cut rates over the next year.
The shift has been noticeable in the market for options on the Secured Overnight Funding Rate, which is closely tied to the fed funds rate. On Monday and Tuesday of this week, one new position was established, with a premium of more than $10 million, that would benefit if the Fed avoids making any moves this year, and do even better if the next change is a rate hike, rather than a cut.
The expectations for a more hawkish Fed pursuing fewer rate cuts was also visible in the market for futures tied to the fed funds rate. Short positions that would benefit if rates don’t fall have been building this week.
Traders are also becoming more bearish on Treasury bonds as the chances of rates cuts go down. A survey of JPMorgan clients released Tuesday showed that net long positions in the Treasury market are at the lowest level in five weeks as outright longs dropped for the third consecutive week.
Here’s a rundown of the latest positioning indicators across the rates market:
JPMorgan Treasury Client Survey
In the week up to March 24, JPMorgan’s Treasury Client Survey showed a drop in long positions by 2 percentage points, moving the net positioning to the least long since Feb. 18.
Treasury Options Premium
There is an increasing divergence in the cost between hedging in the front-end of the curve vs. the long-end shown by the gap between the skew on 2-year note options, which remain close to neutral vs. long-bond options, where the cost of hedging a rally is increasing, favoring call premium.
Most Active SOFR Options
Open interest changes over the past week have seen heavy position adds around the 95.875 strike due to flows including SFRZ5 95.875/96.125/96.375/96.625 call condor while open interest has also climbed in the 96.25 strike with flows including a buyer of the SFRU5 96.25/96.75 call spread. For liquidation, there was a large amount of risk coming out of the 96.00 and 95.125 strikes over the past week largely due to liquidation via SFRZ5 96.00/95.125 put spread bought from 12.25 to 13.
